A reputational battle is playing out across financial services as traditional financial providers get to grips with the latest wave of technological disruption posed by fintech companies. However, while innovation can certainly help fintech companies to stand out, achieving dominance in financial services often means shaking up common views of well-known financial brands.

So, what’s the best way for market newcomers to shake things up? An increasingly common tactic is for newer players to suggest that traditional providers are less trustworthy. This is precisely what’s happening now between new fintech firms and traditional financial providers.

Admittedly, there’s nothing new about this “trust me, not them” tactic. It’s a pattern we see all too often in global finance, particularly in large, mature markets, where providers struggle to differentiate. However, this time around, the tactic has an interesting twist…

Clients, and the public at large, are now asked to believe that distributed ledger technologies (or blockchain), Artificial Intelligence and automation, can not only remove the “dodgy” human element in financial transactions, they can remove the need for trust altogether.

This latest twist on who or what to trust is problematic. It speaks to a poor understanding of how trust actually works across financial services, since markets were deregulated some decades ago.

…But before I continue, let me first acknowledge that you’re probably fed up with hearing about trust! Trust has become rather an obsession of modern discourse. We seem to talk about trust more than ever before.

Of course, when it comes to financial services, an obsession with trust has always seemed justified. The traditional view is that trust is the lubricant of the financial system. If this still holds true, then the financial sector still has a long way to go in addressing systemic issues – high fees, opaque practices, red tape, poor customer care, branch closures, data breaches, and mis-selling, to name a few.

That said, the idea that we can create “trust free” financial services is a myth. All technologies rely on trust – just not the kind of trust most of us identify.

“Trust-free” is actually abstract or faceless trust

For the last 30 years, since financial services were deregulated in markets around the world, the trust underlying most market transactions is a form of generalised, abstract or “faceless” trust in the financial system itself, rather than trust between specific people, groups or organisations.

Researchers have long pointed out that abstract trust enabled modern financial markets to expand throughout the 1990s, and thrive thereafter. Abstract trust allows market players to buy, sell and trade with each other across platforms without ever seeing each other’s faces. Equally, abstract trust gives consumers the peace of mind they need to use cashpoints, online banking, and mobile payments.

The important thing about abstract trust is that it always co-exists alongside other forms of trust, such as interpersonal trust between human beings. Abstract trust cannot emerge without these deeper forms of trust being present in the first place.

So to argue that distributed ledgers and Artificial Intelligence can deliver trustless finance is disingenuous. Quite the contrary: as a recent study shows, organising finance around new platforms and technologies has not eliminated the need for trust at all. It has simply shifted the location and character of vulnerabilities in specific financial organisations, and across the financial system as a whole.

Abstract trust relies on financial experts trusting each other

Abstract trust, and the technologies it enables, are not the real issue in finance today. Far more important are the cracks and fissures in the deeper layers of trust between market players. We only have to cast our mind back to the credit crunch and the global financial crisis to recall the havoc wrought when financial providers stop trusting each other.

But what’s causing these fissures between market players? Part of the problem is that what passes for trust between market players is often a form of trust-by-proxy, in which financial providers publicly back a market mechanism as a necessity, while privately regarding it with scepticism.

Trust-by-proxy has enabled the proliferation of questionable credit ratings, risk valuations, currency benchmarks, and company audits. While the cynical mind-set supporting these mechanisms may have been jolted in recent years, the mind-set still remains.

My own research has shown that where markets are highly-combative, market players will cynically use trust – and mistrust – as a shield or weapon against competitors. Unfortunately, this isolationist and combative approach stymies financial services’ ability to rebuild trust after successive crises. Addressing this cynical behaviour is a central challenge for future leaders of finance.


Cross-posted from Fin Tech